(Price) War and Peace

Is a price war coming to our mobile phone networks?Photo: Linzy. Source: Morguefile

Verizon recently followed its rivals in offering an unlimited data plan. They’ve long had the broadest network, but they’ve been losing revenues by 1% per year for the past several years. By rolling out unlimited data priced right around what AT&T and T-Mobil offer, Verizon hopes to recapture some of the market share that they recently lost.

I remember gas price wars in the mid-‘70s. There would be gas stations on all four corners of an intersection, and when one dropped its price, the others would follow suite, eventually pushing prices down to the wholesaler’s level. The stations tried to distinguish themselves from one another, but they weren’t successful. People saw gasoline as a generic product whose principal feature was its price.

Eventually, marginal gas stations dropped out. We didn’t need so many vendors. The losers tended to be independent stations who couldn’t get price breaks from their distributors. But consumers won; despite many fears, prices didn’t jump right back after the marginal players dropped out.

We’ll see what happens with our mobile phones. Verizon and AT&T are the dominant providers, and people see cell-phone service as a generic product. The main feature to the consumer is price; the main feature for the investor is the dividend. These aren’t growth stocks in a growth industry anymore. With AT&T running a 15% operating margin and Verizon at 22%, there’s room for both to cut prices a little more.

With their stronger network and higher margins, Verizon looks like it could win this war. But the real challenge for the victor won’t be winning the war. It will be winning the peace. Anyone can cut prices. It takes a lot more to satisfy customers.

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Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. -
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